Investing Topics: Oil Prices

Given the uncertainty and volatility in the energy sector, we prefer midstream names that offer the best leverage to volumetric growth stories and have the balance sheet strength to pursue joint ventures with cash-strapped rivals.

Crude-oil prices collapsed last week due to a combination of fundamental and technical factors.On the fundamental front, the rapid recovery in US oil production has been and will remain the biggest story in 2017. Odds are good (better than 50 percent) that WTI will approach the low end of our anticipated $40 to $45 per barrel price range before stabilizing.

The breakdown in oil prices dominated financial headlines over the past week. WTI had ranged between $50.50 and $51.50 per barrel for much of 2017 until the commodity tumbled through this floor, the psychologically important price of $50 per barrel and the 200-day moving average of $48.67 per barrel. What happened?

The big story for energy markets in the first half of 2017 will be a stronger-than-expected surge in US shale oil production that keeps the lid on global oil prices. To take advantage, we’re adding a midstream processing and pipeline company to the portfolio.

OPEC's Nov. 30 meeting yielded an accord to cut oil production by 1.2 million barrels per day, sending the price of West Texas Intermediate 9 percent higher on Wednesday and 3.5 percent higher on Thursday. After this exuberance subsides, the market's focus will shift to whether OPEC members honor their agreement and a potential recovery in US oil production.

US oil production appears to be bottoming, but investors seeking to profit in an environment where prices will likely range between $40 and $60 per barrel must pay attention to basin-specific trends as well as companies’ balance sheets and acreage quality.

OPEC's upcoming meeting to decide the next round of oil production faces a number of obstacles, making a variety of outcomes possible. Here are the most likely ones, as well as the reasons oil will likely head to the $30s per barrel.

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